FRIENDS PROVIDENT has warned its potential merger partner Resolution that it will have to tear up a controversial executive compensation scheme if it hopes to seal a deal.

In a letter seen by The Sunday Times, Friends chairman Sir Adrian Montague claims that the scheme would reward Resolution’s senior executives for a “general market recovery” in share prices rather than performance. Resolution’s bonus scheme links the pay of management to the market value of the company.

The letter, sent to Resolution’s chairman Mike Biggs last Friday, attacked the group’s structure as “a recipe for conflict” and warned that it “institutionalises a lack of clarity and accountability to shareholders, customers and regulators”.

The warning over executive pay was one of the negotiating conditions put forward by the Friends board on Friday, in the latest twist of a week-long tussle between the two groups.

Resolution, led by the insurance entrepreneur Clive Cowdery and John Tiner, former chief executive of the Financial Services Authority, proposed a takeover of Friends last weekend. Although Friends rejected that offer last Monday, the life assurer has now turned the tables on Cowdery by proposing a takeover of Resolution instead and insisting a deal will only take place if Resolution moves out of Guernsey.

Cowdery is expected to return with a revised proposal this week, which will include plans to keep paying a dividend to Friends shareholders for the next two years. He will offer a cash alternative to small investors. Cowdery’s £600m acquisition vehicle is incorporated in Guernsey, but listed in London.

Montague’s letter calls for the bonus scheme to be replaced with conventional long-term incentives and restricted share options before the life assurer agrees a tie-up.

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